Fighting fakes: Ahead of US IPO, Alibaba takes a tougher line

Alibaba is taking a tougher line against counterfeit items sold on its online marketplaces as the Chinese e-commerce giant heads towards a U.S. stock listing that could be the world's biggest technology company IPO.

Some security experts say the Chinese group's stricter standards on piracy and fake goods may even surpass those of Amazon.com and eBay.

In its IPO filing last week, Alibaba Group Holding said the perception that its sites are cluttered with counterfeit items could hurt its ability to win over customers, investors and U.S. retail partners. The group, founded by entrepreneur Jack Ma 15 years ago, has stepped up efforts to clean house over recent years.

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Alibaba headquarters in Hangzhou, China.

For example, Eduardo De Arkos last summer stumbled across a supplier attempting to make a counterfeit version of a floating pool toy his company made. Two days after contacting Alibaba, the supplier of the counterfeit had been removed.

"They reached out to the supplier and told them they couldn't do that," said De Arkos, CEO of U.S. company Innovative Watersports that has sourced through Alibaba since 2012. "That's peace of mind a lot of people need when manufacturing overseas."

Alibaba's forceful response is a far cry from a few years back when its businesses were listed on the U.S. Trade Representative's list of "notorious markets" for intellectual property (IP) infringement.

"This is a much more aggressive stance than I've seen taken by U.S. marketplaces, including eBay," said Richard Last, a professor of retail at the University of North Texas and a former J.C. Penney executive.

A long road

But, given China's reputation for churning out fake goods, Alibaba still has much to do to convince the world it's not a hub for piracy and knock-offs.

China and Hong Kong accounted for 93 percent of the value of IP infringing products seized by U.S. Customs and Border Protection in fiscal year 2013, according to a U.S. government report. The previous year, China accounted for 72 percent.

This has deterred some U.S. retailers from opening stores on Alibaba's Taobao and Tmall marketplaces, experts said. To go around that problem, Alibaba will launch a separate service with Amazon rival ShopRunner to sell items from more than 100 U.S. retailers to Chinese consumers.

In its IPO filing, Alibaba acknowledged it could be exposed to lawsuits. "Although we have adopted measures to verify the authenticity of products sold on our marketplaces and minimize potential infringement of third-party intellectual property rights ... these measures may not always be successful," it warned. "We may be subject to allegations and lawsuits claiming that items listed on our marketplaces are pirated, counterfeit or illegal."

Listing in the United States may expose Alibaba to the kind of lawsuits over selling counterfeit goods that eBay and Amazon have fought for years—a magnet for litigious companies that don't now have to fight Alibaba on Chinese turf.

"I'm sure people will have a go," said Chris Bailey, a China-based executive at IP law firm Rouse. "The value of suing someone in the U.S. if you win is greater than China."

Merchant mischief

Making things tougher for Alibaba, whose websites shift more goods than eBay and Amazon combined, merchants touting their fake goods are both savvy and persistent. They also use social networks like microblogs and mobile messaging apps to speak to potential customers and arrange payment and delivery, making it harder for Alibaba to track them.

"My shop has Chanel, Dior, Gucci, it does all kinds of bags. We get Louis Vuitton purses for 200 yuan ($32) and I sell them for 300 yuan," said one Chinese merchant based in the southern city of Guangzhou, who uses Alibaba's Taobao marketplace website to sell fake luxury goods.

"Taobao gets stricter every year, and last year they became particularly serious. I heard it was because they'll IPO," said the merchant, who didn't want to be named for fear of his business being damaged or legal repercussions.

He added that if Alibaba shut down his online store, he'd simply open another using a friend or relative's details to register.

With Alibaba, "the process is a lot more involved," said Rick Watson, CEO of Merchantry.com, which builds online marketplace software for Amazon and other companies. "They ask a lot more questions. They ask for upfront money—a deposit. I'm not aware of the U.S. companies doing that."

Measuring up

Almost a quarter of Alibaba's 20,000-plus workforce, plus volunteers, form an IP protection team, and the company spends over 100 million yuan ($16 million) a year fighting counterfeit goods. In the past year, it removed more than 100 million hyperlinks to products suspected of IP infringement, the company said in a February filing to the World Intellectual Property Organization (WIPO).

EBay spends as much as $20 million each year on "buyer protection programs", such as reimbursing buyers for fake goods they bought on eBay's market, according to a 2010 U.S. federal court filing after Tiffany & Co alleged that eBay did little to clear up counterfeit goods sold on its site.

The San Jose, California-based company also set up a "Trust and Safety" department with some 4,000 employees, including more than 200 who focus just on combating infringement, and 70 who work exclusively with law enforcement, the court filing noted. eBay has a total workforce of around 33,500.

"Nothing is more important than the trust of our customers," and eBay employs a range of anti-counterfeit and fraud measures, a spokesman said in emailed comments to Reuters, adding that eBay has more than 40,000 rights owners signed up to its Verified Rights Owner Program.

According to its WIPO filing, Alibaba's Taobao had 36,000 registered rights holders by 2013.

Amazon, too, faces a growing problem of counterfeit items as it relies more on third-party sales to pay for its other growth initiatives. Third-party sales are a lucrative business, accounting for about 40 percent of Amazon's unit sales - and around a quarter of total revenue.

As of 2012, Amazon had more than 100 employees "in risk investigation, including counterfeit listings," according to a California court filing that year. The company estimated it blocks 5,900 sellers a year suspected of "infringing conduct," and "cancelled 4 million seller listings" over the course of a year. Amazon declined to comment for this article.

For Alibaba, countering the counterfeiters should both reduce the risk of fending off lawsuits, and make it more attractive to overseas clients and investors.

"In this business reputation is everything," said Kent Kedl, managing director of Greater China and North Asia for Control Risks, a risk consulting firm.

"Brand is something companies are trying very hard to build and if their brand is associated with really good buyer access and protection of IP it can serve only to increase brand value and the value of the company."